High Cash, Low P/E Not Chrysler’s Alone

Playwright Henrik Ibsen, whose stark portrayals of degenerative social conventions shocked many in his 19th Century audiences, put it this way: “The minority is always right.”

The minority who’ve kept faith in Kirk Kerkorian’s scheme to acquire Chrysler at $55 a share have felt the heat from a nearly unanimous chorus of commentators and analysts questioning Kerkorian’s motives and the viability of his offer.

But what if the minority is right? What if Chrysler is a “cheap” stock, poised to be gobbled up by a raider?

What would be the next Chryslerlike shooting star propelled by a crafty corporate raider?

For a clue, comb Morningstar’s “U.S. Equities OnFloppy” software for industrial companies in the Standard & Poor’s 500 with two of the principal factors that appear to have attracted Kerkorian to Chrysler: a low price/earnings ratio and a cashrich balance sheet.

Use data from Dec. 31, and as a substitute for cash, take the ratio of current assets - cash as well as inventories and accounts receivable - to current liabilities - debt and other obligations due within a year.

Chrysler stock is trading at less than 5 times its most recent four quarters’ earnings per share. A year ago, the P/E was nearly 7. Chrysler’s debt structure, expressed as the ratio of its debt to stockholder equity, has improved in the last 12 months and is well below that of competitors Ford Motor and General Motors.

And then there’s Chrysler’s widely discussed cash horde of more than $7 billion.

Three of the companies that popped up show why more needs to be done in picking stocks than simple computer programs.

The three that presented themselves are Paccar, a truck manufacturer based in Bellevue, Wash.; Cummins Engine, a maker of diesel engines, based in Columbus, Ind.; and Outboard Marine, a maker of pleasure boats and boat engines, based in Waukegan, Ill.

Each of these companies is a classic cyclical stock with a low P/E whose share price has been going nowhere in recent weeks. Yet each has improved its earnings and balance sheet.

Of the three, the one that looks the most inviting, based solely on financial statements, is Paccar. It’s three most recent quarterly earnings reports have topped Wall Street estimates. Nearly 20 percent of manufacturing assets was cash.

Standard & Poor’s credit analysts praise the company’s conservative management and product quality. S&P notes that Paccar’s highly liquid financial position will protect it against an economic downturn.

But stock analyst Steven Colbert, who follows Paccar for Prudential Securities, says he’s maintaining his “hold” recommendation and not upgrading it to a “buy,” in part because insiders, including Chief Executive Officer Charles Pigott, control more than 30 percent of the shares. This ownership is a major barrier to a raid.

At Cummins, the story is similar. The last three quarterly earnings reports beat Wall Street forecasts. S&P recently raised its credit rating on the company, citing the “strong financial profile, which should limit credit quality deterioration in a downturn.”

But much of Cummins stock is controlled by two of its major customers - Ford and Tenneco. Ford has an agreement whereby it could control 20 percent of the stock.

Outboard Marine, meanwhile, over the last five quarters has far exceeded Wall Street earnings forecasts - in one quarter, in fact, its profit more than doubled the consensus estimate compiled by Zacks Investment Research.

However, S&P noted that the boating industry is highly vulnerable to an economic downturn and higher interest rates and said the company will need to tap its cash flow for capital investments in the near future.

Outboard Marine’s cash was 5 percent of assets in the latest period reported, far less than Chrysler’s 16 percent. In short, a raid on Outboard Marine would be a risky undertaking.